Foreign Direct Investment (FDI) is an investment made by a company in a foreign country with the intention of establishing business operations, acquiring assets or participating in joint ventures.
It involves a long-term relationship between the investor and the recipient country and can take various forms such as;
- Acquiring a controlling stock in a foreign company
- Mergers and acquisitions
- Joint ventures with foreign corporations
- Starting a subsidiary of a domestic firm in a foreign country
Types of FDI
There are four types of foreign direct investment, these are; Horizontal FDI, Vertical FDI, Conglomerate FDI and Platform FDI.
Horizontal FDI - This is the most common foreign direct investment where a company expands its services into another company. In this case, the company will continue the same line of business in the foreign country. Example an Apparel manufacturer in France opening a new store in the US.
Vertical FDI - this is also a common type of FDI where a company opens a new line of business in a foreign country. However, the new business is related to the company's main business. Example, Apple producing phones in America but manufacturing parts in China.
Conglomerate FDI - this happens when a company acquires a new line of business in a foreign company which is unrelated to its main line of business. This is uncommon because of the additional layer of difficult of entering into a new market in a foreign country.
There are different reasons why companies invest in other countries. This could be to source for raw materials, or expand its status to become a multinational company. The US and China are the highest recipients of Foreign Direct Investments.